China Pulls The Rug From Under Europe, Halts French Bank Transactions, Makes Good On Trade War Ultimatum

A flurry of headlines out of China suggest global macro-economic volatility may be ready to take it to the next level. We discussed last week how China's oh-so-generous offer of help to Europe was merely a veiled threat playing US against Europe in a game of who-gets-the-funding. Well, tonight, it seems, they are making good on some of those threats. Aggravated by EU's lack of market economy recognition, they pull trading lines with French banks, express concern at the EUR's safety (preferring US Treasuries), and indicate a clear preference for bonds over stocks - all the while warning of growing trade tensions - consider the sabre-rattled.

A big market-making state bank in China's onshore foreign exchange market has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, two sources told Reuters on Tuesday.

The European banks include French lenders Societe Generale , Credit Agricole and BNP Paribas.

"Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped," one source who is familiar with the matter told Reuters.

China, the largest foreign holder of U.S. government debt, will keep buying U.S. Treasuries, the official People's Daily, the ruling Communist Party's mouthpiece reported on Tuesday, citing government researchers.

In an article about the reasons for China's increased purchase of U.S. Treasuries, the newspaper cited Yan Xiaona, a researcher with the Chinese Academy of Social Sciences, as saying that the dollar "is relatively safer than the euro" because of the unfolding sovereign debt crisis in Europe.

It seems that China did not get the answer they wanted from the Europeans and just as we said last week, swung back in favor of the US - TSYs as opposed to stocks. China 3 - Europe 0 - US 1 is the approximate score in this first round perhaps.

UPDATE: The 'game' continues into the night as China's Xinhua News cites absolutely noone when it claims Fitch's bearish stance on China's banking industry has prompted suspicions of a 'conspiracy'. And remember Fitch is French-owned.

With Europe perceiving Fitch as “purposely targeting” the region, the ratings company needs to find a new candidate to add to the “blacklist” to show its fairness, the report said, citing Wu Jingmei, head of Renmin University of China’s credit rating research center.